Over the years, there have been some significant advancements in equipment, changing the face of competition in the construction industry. This means that if companies don’t have reliable, effective tools- they can’t compete.
This becomes a challenge for smaller construction companies without large cash reserves. Even a smaller construction project may require expensive equipment. How can a smaller company obtain equipment that costs tens of thousands of dollars?
There are so many options for equipment financing, that there’s not a simple answer to this question. Many small construction company owners may use a combination of equipment leases and loans. Some others may choose to purchase some equipment and lease others.
To determine what is right for you, it’s important to determine the following:
Business goals
Financial health
Timeline
In this article, we’ll go over each tool in the construction equipment financing toolkit and review the steps of obtaining leasing and financing for construction equipment.
Loans vs. Leases vs. Rentals
First of all, when it comes to financing construction equipment, it’s important to understand that you have a few options. There are three options that you can mix and match:
Business Loan
Construction equipment loans are designed to finance construction equipment. You borrow the money from a finance company to purchase the equipment. Once you make your final payment, the equipment is yours. In most cases, since the equipment is used as collateral, a heavy equipment loan is much easier to obtain.
You may also be able to use a term loan to finance your construction equipment- but make sure to check the restrictions before proceeding.
Leasing
Another popular way to finance construction equipment is a lease. This reduces your upfront costs. A lease doesn’t require a large down payment. Instead, you make regular payments on the equipment for the lease period. Typically, a lease requires monthly payments but depends on your lease agreement.
At the end of the lease period, the equipment is usually returned to the company. You may be given an option to renew your lease, purchase the equipment outright, or upgrade to new equipment on a new lease.
Renting
If there is a particular piece of equipment that you only need for a short time, you may want to consider renting. A rental is much like a lease. The primary difference is that a rental covers a shorter period than a lease.
Tips for Obtaining Construction Equipment Financing
Below, we’ll look at the application and qualification process for construction equipment financing.
Construction Equipment Loans
The application process for a construction equipment loan varies from one lender to another. Traditional banks require the most paperwork. In addition to filling out an application, you will need to provide the following:
Credit reports
Business plan
Financial statements
Tax documents
Once you submit your application packet, you will typically get a decision within 90 days.
The process is the same as that for a general commercial loan. The difference is, that you’ll need to also include documentation regarding the project you are working on and the equipment you are purchasing because the lender will use the equipment as collateral so they will need to do their valuation of the equipment.
If you are approved for an equipment loan, you must use those funds only for that purpose. You will not be able to use them for anything else, such as real estate, payroll, or inventory.
Construction Equipment Leases
The good news is that the eligibility criteria for leases are less strict than on loans. This is because, with a lease, the lessor still owns the equipment, so their risk is much lower.
However, just because the criteria aren’t as strict, the application process looks just like it does for loans. Also, credit score, revenue, and time in business are involved in the decision process.
Steps to Securing Financing for Construction Equipment
Find one or more companies that offer equipment loans/leases
Gather required paperwork
Complete application with accurate information
Wait for a response from the lender
If approved, wait for the offer and sign to begin the closing process
Is Construction Equipment Financing Right for Your Business?
Be careful if you find a lender that’s willing to offer financing without knowing anything about your business. The truth is, your decision of whether to finance, lease, rent, or buy the equipment depends on several factors:
Business model
Market demand
Cost of equipment in your location
Type of equipment needed
Typical project length
Therefore, to determine your best financing option, you should compare the total cost of leasing versus ownership. To do this, consider the following:
Cost of fuel
Maintenance/repair costs
Loan/lease payments and fees
Insurance
Cost of replacement
Operator hours/cost
Depreciation
Spare/replacement parts
If you are ready to move forward with obtaining equipment for your construction business, contact Array Financial for more information.